Senate Hearing, 106TH Congress - Slotting Fees: Are Family Farmers Battling To Stay On The Farm and in The Grocery Store?

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SLOTTING FEES: ARE FAMILY FARMERS
BATTLING TO STAY ON THE FARM
AND IN THE GROCERY STORE?
THURSDAY, SEPTEMBER 14, 2000
UNITED STATES SENATE,

COMMITTEE ON SMALL BUSINESS,
Washington, D.C.
The Committee met, pursuant to notice, at 1:10 p.m., in room
628, Dirksen Senate Office Building, the Honorable Christopher S.
Bond (Chairman of the Committee) presiding.
Present: Senators Bond, Burns and Kerry.
OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S.
BOND, CHAIRMAN, COMMITTEE ON SMALL BUSINESS, AND A
UNITED STATES SENATOR FROM MISSOURI
Chairman BOND. Good afternoon. The hearing of the Small Busi-
ness Committee will come to order.
I have to apologize. For those of you who are familiar with the
way the Senate works you will realize that Murphy was an opti-
mist when he propounded Murphys Law. We have just had a vote
that started a few minutes ago. That is why I am late. Several
other of my colleagues are tied up in votes. We also have Floor de-
bates and other activities going on, but I thought it was important
that we get started on this extremely significant hearing. I want
to thank everybody who has come today, witnesses and those who
came just to learn more about it.
One year ago today the Small Business Committee held its first
hearing on the use of slotting allowances by the retail industry and
the impact that that has on small manufacturers. That hearing
came about because of complaints expressed to my Ranking Mem-
ber, Senator Kerry, and me from small manufacturers. I am
pleased that we have worked on this problem in a bipartisan man-
ner.
Since that first hearing, the Committee continued investigating
this practice and, at the Committees request, several Government
agencies initiated efforts to take a closer look at slotting allowances
and the impact of these fees on competition.
This afternoon the Committee will continue reviewing what we
have learned about this issue within the last year, what remains
to be examined, and the steps Congress and Federal agencies
should now take, among other things, to gain a better under-
standing of slotting fees.
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Additionally, this hearing will address produce farmers being

compelled to pay slotting allowances and similar fees. Many small
produce farmers and the associations representing them contacted
the Committee to express their grave concern about the type of fees
contributing to the downfall of Americas small family farms.
As we will hear today, small farmers receive only a small frac-
tion of the price consumers pay for produce. When farmers are also
required to pay up-front fees or provide free merchandise to retail-
ers to stock their produce, it becomes significantly more difficult for
farmers to make a profit and continue to farm. We will hear today
about these types of retail practices and what they mean for small
farmers and consumers.
The Small Business Committee began looking at the issue of slot-
ting in response to numerous complaints, as I said, received from
small businesses about what appears to be a fundamentally unfair
and perhaps unlawful retail practice which has continued to be
concealed not only from the eyes of Congress and the agencies but
from consumers and the public at large.
There are many definitions about what a slotting fee is, but most
agree that slotting fees generally take the form of up-front pay-
ments of cash or product from a manufacturer to a retailer in ex-
change for the retailer stocking the manufacturers products.
Through the Committees investigation hearing last year, we
learned that large-chain retailers routinely demand substantial up-
front slotting payments from manufacturers to get products on the
shelf or to keep them on the shelf. We are talking about the most
expensive real estate in America.
Chain retailers often exclude the products of small businesses
simply because they cannot afford the excessive payments. Retail-
ers frequently ignore the quality of a manufacturers product when
determining who gets on and who stays on the shelf. Whether a
product is available to shoppers may depend solely on how much
the manufacturer is willing to pay the retailer.
During its investigation the Committee has heard countless theo-
ries and anecdotes about what these fees are, how retailers request
the fees from manufacturers, how they are treated for tax purposes
and how these fees harm consumers through increased prices and
decreased consumer choice and innovation. In order to make in-
formed policy decisions about this issue Congress needs to get the
full picture of what is occurring in the marketplace. To truly know
when these fees are acting as an anti-competitive force, Congress
and relevant Federal agencies must be able to compile the facts
about how much retailers collect, how the fees are negotiated, and
for what the fees are used. Acquiring this data, however, has been
almost close to impossible.
It seems that these fees are the dirty little secret in retailing.
Often nothing is in writing between the manufacturer and the re-
tailer, and the amount of money paid in slotting fees is usually
known only to supermarkets, their brokers and distributors.
In addition, most small manufacturers have expressed consider-
able fear of retribution from chain retailers for valid reasons and
we have heard too many instances where someone complaining
about slotting fees has been totally excluded from the market. Any-
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body who complains about the fees publicly, even anonymously, if

they are discovered, gets dealt with.
Following the hearing last year this Committee requested the
GAO to conduct a study on the use of slotting fees and other re-
lated fees in the retail grocery industry. We asked the GAO to col-
lect the basic information on the types of fees being charged, the
amounts, how manufacturers and retailers account for the fees,
whether the fees are the same for everyone, the manner in which
retailers demand such fees and the existence of the fees in other
retail environments. Unfortunately, the GAO, despite its best ef-
forts, could not satisfy this request.
Now we think the Small Business Committee has been very pa-
tient and we worked with both the retail industry and food manu-
facturers for the last year. We tried to get the industry to disclose
data on slotting fees voluntarily. Unfortunately, these efforts have
been futile.
Committee staff has expressed that frustration by drafting pos-
sible language to require disclosure on an annual basis of these
fees. Unfortunately, the industry representatives were unable to
appear today to answer questions about it to justify the process
and we are going to be asking them some questions about it and
asking them why we should not take steps to assure that these fees
are disclosed to competitors and to consumers.
The Federal Trade Commission has been focusing on slotting
fees. They held a workshop in May to address the legal issues sur-
rounding the practice and we appreciate the FTCs work. The FTC
has told us they cannot address the workshop findings until a final
report has been considered by the Commission. Therefore, the staff
is not participating today. We appreciate their cooperation and in-
terest and I have undertaken an initiative to include in the FTCs
budget $900,000 in the Commerce, Justice, State appropriations
bill to examine the anti-competitive effects of slotting fees and pos-
sible remedies. The Committee intends to follow-up with the FTC
to make sure that the Federal Government gets a full and complete
picture and deals with any abuses they find.
One disturbing issue that arose in the workshop was the phe-
nomenon that retailers charge up-front fees for small fruit and veg-
etable growers just to get their products on the shelf. The Com-
mittee had heard from other farmers about these unsavory prac-
tices.
At the hearing last year, representatives of the industry said the
reason they have to charge fees is to mitigate the risk of putting
new products on the market. Well, when you are talking about a
product like this, a tomato, or like this, an orange, there is not a
lot of risk. When I go into the supermarket to buy citrus fruit or
a tomato, I am going to buy the best looking, best quality I see on
the shelf.
You do not need a slotting fee to convince somebody that they
need to buy tomatoes. That is usually on my shopping list when I
go to the grocery store. In any event, these are not new products,
and accordingly, the Committee decided it was appropriate to hear
about why fees are requested from the produce industry and what
they mean for the small farmer.
[The prepared statement of Senator Bond follows:]
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Chairman BOND. Our first panel, and I invite them to come for-
ward, are witnesses representing almost 90 percent of the compa-
nies and farmers in this country who supply fresh fruits and vege-
tables. They will address that issue.
The second panel includes the Administrator of Economic Re-
search Service of the Department of Agriculture. The GAO will tes-
tify on the second panel about their unsuccessful efforts. And
rounding out the second panel will be a distinguished academic,
Professor Gregory Gundlach, who will speak on the status of re-
search on slotting allowances and the evolving theories on the ef-
fect this practice has on consumers and competition, and why it is
important for the Federal Government to receive data on slotting
fees.
We begin the hearing by welcoming Thomas Stenzel, president of
United Fresh Fruit and Vegetable Association; David L. Moore,
president of the Western Growers Association; and Michael Stuart,
president of the Florida Fruit & Vegetable Association.
Welcome, gentlemen. We look forward to your testimony. We will
begin with Mr. Stenzel.
STATEMENT OF THOMAS E. STENZEL, PRESIDENT AND CEO,
UNITED FRESH FRUIT AND VEGETABLE ASSOCIATION, AL-
EXANDRIA, VIRGINIA
Mr. STENZEL. Good afternoon, Mr. Chairman. Thank you very
much for having us at this hearing.
United Fresh Fruit and Vegetable Association is a not-for-profit
trade association representing the producers, distributors and mar-
keters of fresh produce in the United States, working together with
many our colleagues around the country representing regional as-
sociations and also working with our retail and food service cus-
tomers. Our members range from the smallest family businesses to
the largest multinational produce growers and marketers.
I am pleased to testify today on an important issue to consumers
and to our industry and congratulate the Committee for its atten-
tion to this issue. Our industry is committed to providing Ameri-
cans with a wholesome and abundant supply of fresh fruits and
vegetables at the lowest possible cost, and that goal will be para-
mount in my testimony.
Food retailing, distribution, processing and production are expe-
riencing today greater change and consolidation than at anytime in
history. Companies are responding to marketplace forces to seek
greater efficiencies that better serve the ultimate consumer. Yet, at
the same time pressures to compete in this environment are some-
times leading buyers and sellers of produce to become adversaries
rather than partners and often to the detriment of consumers.
Now our industry strongly believes in a free market in which
produce suppliers and food retailers share the common goal of serv-
ing the consumer. The Perishable Agricultural Commodities Act
assures fair trading standards for fresh produce in the United
States. And we are ever vigilant in seeing that the Department of
Agriculture enforces this extremely effective law. Yet, congressional
oversight is needed in todays rapidly changing marketplace. The
Federal Trade Commission, the Department of Justice, and the
U.S. Department of Agriculture all have an obligation to under-
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stand the changing business dynamics in the food delivery system

and to ensure that marketplace trade practices do not become mar-
ketplace abuses of power.
In recent years, a number of trade practices more familiar in the
dry grocery area have become familiar to produce companies. Be-
ginning within the last decade and the growth of packaged salads
in the produce department, we have often seen requests for slotting
fees and similar payments in order to do business.
Now perhaps we were naive not to anticipate this, but many
produce growers simply had no experience with packaged foods and
were taken aback. It just somehow did not seem fair to have to buy
shelf space rather than simply offer your best price and the best
quality and let the chips fall where they may.
We are not so naive today, and our larger challenge is the seem-
ingly growing appetite for side deals, slotting fees, rebates, allow-
ances, promotional fees, and all sorts of charges ranging from ware-
house construction to store remodeling that are not contained in
contracts, do not appear on invoices, and are otherwise unac-
counted for in transactions.
As this Committee and the Federal agencies involved evaluate
the topic of slotting fees, I urge you to look with broad perspective
at the impact of all of these types of off-invoice fees and not be con-
strained by a more narrow definition of slotting.
Our industrys concern about slotting fees and these off-invoice
payments is based on several factors. First, we believe that con-
sumer choice and access to produce will be reduced. Let me empha-
size that I do not just refer to the up-front slotting fees. Today,
produce companies are being asked by some retailers, not all, to
pay numerous off-invoice fees unrelated to the actual product costs.
These rebates and allowances are sometimes tied to promotions or
advertising which can serve consumers and growers alike. But in
many cases they are more likely to be unrelated to any particular
incentives or performance. Because of its charter, this Committee
will naturally be concerned that small- to medium-sized growers
are particularly vulnerable to these demands, but even the very
largest produce companies are concerned about these practices.
Certainly we are concerned about fairness to our industry, but in
some cases these fees paid in advance can leave a retailer with
very little incentive to move more produce volume if their profit is
tied to buying the produce rather than selling it to you as a con-
sumer. That raises serious questions about public health as well,
as government authorities tell us the simple step of eating at least
five servings of fruits and vegetables a day is critical in preventing
cancer, heart disease and other chronic diseases. The soaring cost
to public health of artificially high-priced fresh fruits and vegeta-
bles should be a serious national concern.
Let me address the issue of transparency in how these trading
practices work. Mr. Chairman, you are to be commended for help-
ing to bring these issues out of the closet. The bright lights of this
hearing room are having their effect. I am pleased to say that
through your efforts, the reviews by the Federal Trade Commission
are having some beneficial effects in the industry. We hear from
our members that perhaps there is some dampening of the most
egregious abuses that we have heard reported.
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To that point, transparency and knowledge of industry practices

will help everyone in produce marketing whether they are a grower
or a retailer. In this mysterious world of off-invoice fees, suspicion
grows and trust cannot flourish. Competitors battle ghosts rather
than respond to true economic incentives. Many times we have
found retail buyers who ask for fees simply because they are afraid
their competitor is and they do not know what is being done any-
more than the growers do.
Our organization does not believe this is simply a battle between
produce buyers and sellers, but is rather a wake-up call for the en-
tire fresh food production chain to better understand the cost and
the values of delivering produce to American consumers. Basic
business economics will prevail in an environment in which these
transactions are not cloaked in mystery, but are negotiated openly,
displayed on invoices, with specific performance requirements.
Finally, let me mention a slightly different concern. Traditional
antitrust concerns have focused on regulating manufacturers be-
havior to ensure fair competition, rather than focusing on the pow-
erful buying groups. Frankly, we are concerned today that produce
growers may be at greater risk than their customers who demand
some of these payments. There is great dissension within the retail
supermarket industry today. Many independent grocers feel that
they may not be offered the same deals as some other chains get
and they are madder than heck and say they are not going to take
it anymore either.
Under the Robinson-Patman Act, sellers of products are required
to offer the same terms to all competitive customers. When one re-
tailer demands a special up-front deal to do business, a grower is
placed in a difficult position. What from one side looks like a de-
manded concession may look like special terms to competing cus-
tomers in a given market. As an observer of the stresses in food
retailing today I see a real risk that grocers who imagine they are
not getting the same deal as other retailers may be more likely to
take action against the growers under these antitrust laws.
In addition, as produce suppliers begin to adapt to the market-
place size of their retail customers, we again face the risk of litiga-
tion if we even discuss slotting practices among suppliers. Let me
say that my association and our industry fully comply with anti-
trust laws regarding pricing. But we also believe that many of the
demands currently made in the marketplace should not be consid-
ered part of price negotiations, as they are off-invoice matters unre-
lated to the sale of any lot of produce. In these cases, we believe
Congress and the regulatory agencies should specifically recognize
and protect the ability of produce suppliers to discuss such prac-
tices openly, without regard to antitrust concerns about price set-
ting.
I would call your attention to one exhibit here today, the example
on the chart to my right of a request for a warehouse stocking
charge. In this case produce suppliers fear even talking about
whether they would agree to pay such a demand. And yet, this is
clearly a case in which we believe that suppliers should be able to
simply look at that demand; say it does not make sense; we do not
want to pay it. Under antitrust laws we have great fear about ret-
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ribution in terms of price setting from suppliers discussing whether

to pay these fees.
[The chart follows:]
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In conclusion, today many growers are concerned with what they

see in the marketplace. We recognize that many of the changes are
going to require new ways of doing business, and that is true both
for produce growers and our retail customers. We believe in effec-
tive free market solutions for both buyers and sellers to serve the
ultimate consumer. But to find those solutions we think the chang-
ing nature of our food system must be addressed by all parties
openly and constructively.
We appreciate the Committees commitment to this process.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Stenzel follows:]
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Chairman BOND. Thank you very much, Mr. Stenzel.

Mr. Moore.
STATEMENT OF DAVID MOORE, PRESIDENT, WESTERN

GROWERS ASSOCIATION, NEWPORT BEACH, CALIFORNIA
Mr. MOORE. Good afternoon, Mr. Chairman. My name is David
Moore and I am a farmer and shipper of fresh produce in Bakers-
field, California. I also serve as president of the Western Growers
Association whose 3,500 members grow, pack and ship fresh fruits,
vegetables and nuts in Arizona and California.
WGA appreciates the opportunity to testify before the Senate
Committee on Small Business regarding the impacts of slotting
fees and retail consolidation in the fresh produce industry. Today,
small, medium and large farmers are battling like never before to
remain economically viable. The proliferation of slotting fees and
other anti-competitive business practices by the large supermarkets
is a very real threat to family farmers. Congress and the Adminis-
tration must take action to address this issue.
As retail consolidation continues, growers are seeing the use of
slotting fees and other anti-competitive business practices expand.
This is strong evidence which indicates that retail consolidation
has gone too far.
It is important to note that retail consolidation in the fresh
produce industry is producing anti-competitive practices which go
beyond the use of traditional slotting fees. Over the past few years
our growers have confronted the following practices or fees imposed
by retailers: pay-to-play, pay-to-stay, these fees are appropriately
named; rejection without reasonable cause of perishable commod-
ities and violations of the Perishable Agricultural Commodities Act;
computer/technology-related fee charges; off-invoice demands; ad-
vertising or promotional allowances; slotting fees; interview fees;
category management fees; warehouse construction/new store open-
ing fees; and indemnification and hold harmless agreements.
As an example, one retailer in California known as Ralphs/Food
4 Less Warehouse Stores demanded of grower/shipper suppliers a
new distributing facility opening fee. This effectively required
monetary payment either in free product or direct payment to help
underwrite the cost of construction of a new warehouse that was
constructed to benefit the efficiency of the retailer. There is an all
too subtle message that a refusal to pay-to-play or refusal to pay-
to-stay can be the difference between the ability to sell or not sell
to a particular retailer. I know of no other industry that is required
to provide working capital for a customers new distribution facil-
ity.
Another example, multiple large retailers have demanded food
safety audits of grower/shipper farming operations by a third party
auditor. The recommendation requires the utilization of a specific
auditor recommended by the retailer and also the dissemination of
ones information on a web site which incurs significant expenses
for the grower/shipper. This demand allows for no reimbursement
for the cost of this extra expense of validating practices that may
have already been documented by the grower/shippers own inter-
nal farming and good agricultural practices.
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In another example, a prominent member has articulated that

his business was encouraged by a dominant retailer to contribute
$30,000 under the guise of a promotional allowance for a small ad
for the commodity he was selling. The shipper was not assured that
additional product would be purchased or that any long-term rela-
tionship would be maintained or that any priority for that shipper
would be provided in supplying product to the retailer.
Most recently, our grower/shippers have been encouraged by one
major retailer to prepare for participation in a new e-commerce
venture for selling and buying perishable commodities. While these
technological advancements which facilitate the communication,
transmission of an entire transaction via computer will be bene-
ficial to all in the distribution chain, in this case the fee assessed
for each individual transaction, rather than being cost-shared by
all parties involved, will be a grower/shipper obligation exclusively.
Finally, a retailer recently assessed a fee to help support the
opening of a new warehouse facility. I am told that a supplier was
assessed $2,000 per stock keeping unit which, depending on the
number of produce items you may sell, can be tens of thousands
of dollars that are unilaterally being deducted from the remittance
by the retailer. Clearly, a unilateral institution of fees by the re-
tailer constitutes a direct violation of the Perishable Agricultural
Commodities Act (PACA).
Another disturbing practice our members are experiencing is the
rejection, without reasonable cause of perishable commodities.
Large retailers are rejecting produce and are arbitrarily refusing to
comply with the terms of the contracts without giving any reason
or opportunity for inspection. They just do not want it. This also
is a flagrant violation of the PACA, and is a prime example of the
dark side of excess retail consolidation in our industry.
These are just a few examples of the many types of off-invoice
demands and other arrangements which have not traditionally
been a part of the produce industry. In short, the balance of power
between supplier and retailer has shifted dramatically in favor of
the large chain supermarkets over the growers. The high degree of
retail consolidation is providing the large retailers with the market
muscle needed to squeeze small growers through anti-competitive
practices.
Historically, the consumer would benefit from a surplus of a
given fruit or vegetable commodity through lower prices. Today,
however, declines in prices paid to growers are not being passed on
to the consumer.
WGA maintains a web site (www.wga.com) which reports the
price spread between the price paid to the grower and retail price
charged to consumers. We have seen price spreads of 400 percent
to 1000 percent and even higher for commodities such as iceberg
lettuce, naval oranges, cauliflower. And if you will notice the chart
over here, we handle probably 24 different items we have at all
times on our web site but in the interest of time and clarity we just
brought these three examples here. But you can see the spreads.
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I might just highlight the fact that we have had a disastrous

year in the naval orange business because of overproduction and
other things, which is our fault, no one elses but the price has not
declined. It is a higher price this year than last year when the re-
tailers were paying a much higher price to the shippers.
In many instances, wholesale prices have dropped without any
corresponding decrease in the retail price. This is strong evidence
that consumers are being adversely impacted when large retailers
have the market power to keep prices high when wholesale prices
paid to growers are declining. It is important to note that the price
spreads of 400 percent to 1000 percent between shipper and re-
tailer do not include any additional payments by the growers to re-
tailers in the form of slotting fees, rebates, promotional allowances
or other off-invoice fees.
Unchecked retail consolidation is also adversely impacting family
farmers. The overriding trend is that growers are seeing strong
downward pressure on wholesale prices and operating margins,
while facing slotting fees and other new off-invoice payments. In
essence, the small farmer is being squeezed by retailers who are
getting larger and larger through consolidation, becoming totally
dominant in their market.
The downward price pressure is felt most acutely by the smallest
growers. Should this unhealthy trend continue, it will be difficult
for many U.S. fruit and vegetable growers to maintain economic vi-
ability in markets dominated by large retail chain stores.
WGA believes that the adverse impacts of the unchecked retail
consolidation on both growers and consumers demands serious and
urgent attention by the Federal Government. To date, we have not
seen an adequate response from the Federal Government on this
urgent matter. WGA urges the appropriate Federal agencies to
vigilantly enforce Federal antitrust laws to maintain healthy com-
petition and prevent anti-competitive practices in our industry.
If the use of slotting fees and other off-invoice payments falls
into a gray area of antitrust law, then Congress should amend the
law to provide regulators with guidance in the area. The FTC
should examine the feasibility of developing specific guidance to
provide the foundation for acceptable or unacceptable demands by
retailers.
Possibly the best way to promote vibrant and healthy competi-
tion in the fresh produce market is to prevent further retail con-
solidation in our industry. Another suggestion is to require the
disclosure of slotting fees and off-invoice payments in the re-
tailers consolidated financial statements, such as the companys
Form 10-K.
In closing, WGA believes that slotting fee practices and other
anti-competitive practices are a serious problem that demands fur-
ther congressional attention.
I thank you very much, Mr. Chairman.
[The prepared statement of Mr. Moore follows:]
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Chairman BOND. Thank you very much, Mr. Moore.

Mr. Stuart.
STATEMENT OF MICHAEL J. STUART, PRESIDENT, FLORIDA
FRUIT & VEGETABLE ASSOCIATION, ORLANDO, FLORIDA
Mr. STUART. Thank you very much, Mr. Chairman, and good
afternoon. Florida Fruit & Vegetable Association is a grower orga-
nization that represents producers of fresh vegetables, citrus, trop-
ical fruit and a variety of other commodities. Our members range
in size from single-commodity growers of less than 100 acres to
larger, highly diverse grower/shippers. A large portion of our mem-
bership is indeed family-based.
While the subject of todays hearing is obviously slotting fees, I
think it is important to touch briefly on what we believe is really
the root cause of all of this, and that is consolidation of the retail
industry. According to The Food Institute Report, the five largest
food retailers in the United States accounted for a whopping 40
percent of industry-wide sales of $271 billion in 1998 compared to
5 years earlier when it took the top 20 companies to reach the
same percentage.
As supermarket chains in the United States become fewer and
larger, these retail giants enjoy a considerable bargaining advan-
tage over their suppliers. This is especially alarming for fresh fruit
and vegetable growers, many of whom are, in fact, small- to me-
dium-sized family businesses. As buying power concentrates within
the retail grocery industry, fresh produce growers have fewer cus-
tomers to whom they can sell their products. The net result is con-
tinued pressure to reduce prices paid to growers.
Unfortunately, consumers rarely see the benefit of these lower
prices at the supermarket. For the past several years, the Florida
Department of Agriculture and Consumer Services has conducted
weekly surveys of average farm and food retail prices and major
metropolitan areas around the State. The data generated by these
surveys often show a wide disparity and a general lack of relation-
ship between farm and retail prices for selected fruits and vegeta-
bles. When this happens, consumers get no relief at the market-
place and growers see no increased sales of their products.
In our opinion, it is not likely that U.S. consumers will ever ben-
efit from the continued consolidation of food retailers in this coun-
try if consumers experience in the United Kingdom is any indica-
tion. A 1998 study by the Office of Fair Trading in Great Britain,
a country now dominated by four grocery retail chains, suggests
that British retailers are increasingly able to retain the greater
profits from their increased bargaining power rather than passing
them onto consumers.
A November 17, 1998 article in Britains International Express
estimated that the average family in Britain pays over 1,000
pounds more a year for food than those on the European continent.
That brings us to the issue of slotting fees which is obviously the
subject of todays hearing. In addition to these heightened pricing
pressures, fruit and vegetable growers and shippers are increas-
ingly being asked to provide payments such as up-front fees, allow-
ances or rebates to retailers, ostensibly to support the marketing
costs of the growers crops. In reality, however, growers tell us that
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these pay-to-play or pay-to-stay payments rarely result in any visi-

ble benefits and may only serve to boost the profit margins for re-
tailers. Many of these requests for payments come in the form of
per package rebates that have no relation to product performance.
One request by a large retailer, it has been mentioned here a
couple of times today, involved a per package contribution in order
to fund the construction of its new produce distribution facility. So
in addition to growers having to finance their own operations, they
are also being asked to make direct payments to pay for capital im-
provements for the customers.
I think we all realize that slotting fees have been a mainstay in
the dry goods section of retail supermarkets for many years. We
would argue, however, that slotting fees have absolutely no place
in the produce department of a supermarket. The highly perishable
and seasonal nature of our industry makes that completely imprac-
tical. Because fruits and vegetables are priced-based on supply and
demand forces, these are costs that cannot be passed along in the
marketplace. The bottom line is that growers cannot recover the
costs of these fees. Ultimately, the cost of this pay-to-play practice
comes from growers profit margins, which in todays environment
are very slim and in some cases nonexistent.
In addition to slotting fees consolidation has resulted in other
trade practices affecting growers. In recent years, retail buyers
have put increasing pressure on growers to agree to terms outside
regulations under the Perishable Agricultural Commodities Act.
The net impact of this for a grower is not only the loss of the use
of his money, but also the potential loss of his rights under the
trust provisions of the law. In order to keep business, growers also
report that they more frequently have to accept take-it-or-leave-it
price adjustments on product after delivery, even though there are
no defects that would warrant such a reduction.
Again, these are just but a few of the marketplace issues and
trading practices that growers are facing in the marketplace. Be-
lieve me when I tell you that the scope and variety of these fees
are only limited by the creativity of those requesting them.
Again, Mr. Chairman, we greatly appreciate your time, the Com-
mittees time, and your staff s time in investigating this issue and
we look forward to your questions.
[The prepared statement of Mr. Stuart follows:]
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32
Chairman BOND. Thank you very much, gentlemen.

In both your written and oral statements, several of you touched
on the problem with getting farmers to come forward and testify
even anonymously about the charging of slotting fees. Why are
your members so reluctant to talk publicly about the issue?
Mr. Stenzel.
Mr. STENZEL. It is a very difficult issue, Mr. Chairman. Clearly,
these are buyers and sellers in the marketplace. When our mem-
bers have a relationship with a particular retail customer the last
thing they want to do is call that customer out, if you will, and talk
about what is an extremely controversial subject. I think it is very
clear to everyone in the room and certainly to the Committee that
the retail industry is not here to defend these practices. I think
that is part of the problem, that this has been that dirty little se-
cret that you talked about in your introduction.
The more we can do to bring this area out into the light, let us
talk about these fees and if they can be justified, if they help the
consumer, then fine. But let us have it discussed and transparent
and not cloak it in the hidden area between just that business rela-
tionship where one party is in such a weaker position.
Chairman BOND. We found in our hearing a year ago that out
of some 80-plus people we talked to only 6 of them agreed to tes-
tify, 3 of those backed out. Two of them actually came with hoods
on and disguised voices. Frankly, we had to go to great lengths to
get them. This year we found that the fears were even greater. Mr.
Moore, how does it look from your standpoint?
Mr. MOORE. Yes, we have had some cases where people have
challenged the retailernot only do they lose the business, they
will never be able to do anymore business with that retailer. They
have a way of going out and warning the others, Are you going
to do business with that . . . and I will use the term, . . . SOB?
We have actually had people cut out of the marketnot only the
one that he is maybe addressing, having a problem with, or has
challenged some of their practices, but as a result of their com-
plaints, they have been driven out of business.
Chairman BOND. Mr. Stuart, I might add another question here.
During the investigation the Committee heard arguments that fees
charged to growers whether variable or fixed really are passed
along to consumers in the form of lower prices and that they do
benefit growers. Have you any information on whether price de-
creases have been associated with fees paid by growers and do your
members see any benefit for them in these up-front fees?
Mr. STUART. Mr. Chairman, quite the opposite. If I had to list all
of the calls I get on a weekly or a monthly basis from my members,
this particular issue ranks head and shoulders above any other in
terms of an issue that brings morethe most emotion to the table
in terms of marketplace practices. The reason they are calling is
because they see no value in the marketplace. They see, as these
charts exemplify, over the last few years the returns back to the
grower, back to the farm being reduced, and becoming tighter to
the point where you have got a lot of red ink on the balance sheet,
yet they see this disparity between the farm price and the retail
price seem to grow on an annual basis.
33
So no, I do not see that there is any benefit whatsoever back to

the grower at this point in time. I see no evidence whatsoever that
there is any benefit to the consumer, certainly not if you look at
some of these markups and see what the retailers are charging for
some of these products in various cities around the country.
Chairman BOND. Mr. Moore, you testified that besides being
president of the Western Growers, you are also a produce farmer.
Have you experienced personally any of these demands for fees?
Mr. MOORE. Yes, I have, Mr. Chairman, and a lot of time if it
is not directly, it will be because sometimes I am forced to send my
product through another larger shipping organization. It gets
passed through to growers so naturally those fees have to be paid
by someone. So I am affected on the products that I grow.
Chairman BOND. Are any of you finding that these fees are
charged only in connection with exotic produce such as star fruit,
or are they charged across the board for the basics that we all get
in the produce department?
Mr. MOORE. I will use some examples. We truly understand why
the retailersare renting space. If they have a product come in,
they do not know if it is going to move. A few years ago we had
a product called broccoli flower. Well, when it first hit the market,
they did not know if it was going to move or not. We understand
why you might have to do something to encourage the retailer to
have that space used for that. Items such as that or when these,
what we call value-added products, the lettuce mixes and all that,
when they first started they were not moving out rapidly. So we
understand why you have to do something to get your product on
the shelf.
But again, the perfect example you made when this hearing
started, what is new about a cantaloupe, an orange, a potato, or
a head of lettuce? I mean that is the part that bothers me. These
are pretty standard and we know that they are going to move and
why isnt the 400 percent to 800 percent markup enough without
having to go to these other measures?
Chairman BOND. Mr. Stenzel, BATF has prohibited the payment
of slotting fees in relation to marketing of alcohol on the grounds
that the fees do not promote competition or benefit consumers. Now
we understand there are special policy considerations surrounding
the sale of alcohol, giving BATF the authority but is there any rea-
son why the similar rationale should not apply in produce?
Mr. STENZEL. Mr. Chairman, I think one of the most important
things that this Committee has been able to do with your leader-
ship thus far is to work with the Federal Trade Commission to
really get the Bureau of Competition energized. We salute what
you have done with adding the $900,000 in their budget for this
particular issue. They have got to look at that. They have got to
look seriously at what type of regulation might be appropriate in
this whole area of slotting fees for perishable products where they
are clearly not appropriate.
I think it is important that the FTC looks at guidance to the in-
dustry. That may be certainly an outcome of the hearings, the 2-
day hearings that the FTC held earlier. I think they have got to
look at transparency. Again, I am going to come back to that as I
34
think the light of day shines an awfully big spotlight, and that may
be our ultimate best solution.
Chairman BOND. Do any of you know of any instance where
there is disclosure to any of the ultimate consumers of your
produce? Do consumers have any idea about the payment of fees
going on to get that produce on the market?
Mr. STUART. No evidence of that whatsoever that I have seen.
Mr. MOORE. None whatsoever.
Chairman BOND. Mr. Stenzel.
Mr. STENZEL. No, and in fact, Mr. Chairman, we do not find it
in terms of disclosure and financial accounting within the retail su-
permarket industry. I think that is one of the concerns, as eco-
nomic theory might hold that some of these payments, particularly
if they are variable payments or volume-based would be passed on
to the consumer. But that is making the supposition that they are
used to reduce the cost of goods sold.
Clearly, in many of these cases these payments are accounted for
and there is no relationship to reducing the cost of goods sold to
the consumer. So not only are they not disclosed to the consumer
generally, they are not disclosed in accounting particularly at the
retail level.
Chairman BOND. If they are not disclosed, that is something our
friends at the IRS might be interested in. That is another problem.
In the slotting hearing in 1999, we heard instances of special pay-
ments which included things like hiring babysitters and buying
cars that probably did not show up in anybodys 1099 or their 1040.
We have been joined by my colleague from Montana, Senator
Burns. Would you have any questions? Is there anything that you
would like to put in at this point?
OPENING STATEMENT OF THE HONORABLE CONRAD BURNS,
A UNITED STATES SENATOR FROM MONTANA
Senator BURNS. Thank you, Mr. Chairman, and thanks for this
hearing. I did not know you started at 1 oclock. I thought it was
1:30 and here I come along, I am consequently a little late and I
want to apologize for that.
These slotting fees and selling shelf space, I understand that
Safeway is not buying any domestic lamb now, they only want New
Zealand Lamb and things like that, strike the fear of the heart of
all of us who represent the agricultural community. We do not
know how to break this practice to be honest with you.
Things are not good on the farm. We are selling wheat now for
less than we did before World War II. We are not getting along
very well out there, but yet our cost of pickups and equipment and
everything else keeps going up and we are really in a bind. And
we do not see one son of a gun in this country who gives a damn,
not one, not a packer or a processor or purveyor or a grocery store
trying to keep our people, producers, in business. Not one.
I think we are at the end of things. I have said what has been
wrong with agriculture for a long time, we cannot get enough of the
consumer dollar back to the farmer or ranch. But as long as this
country has its belly full, consumers will not, they are not going
to care. Do you realize right now if I could gather up enough money
to invest in an oil well on a speculative basis or a gas well, do you
35
know how long it would take to put together a drilling crew? Forty-
five days.
Our ability to look for, discover and lift petroleum from this
earth, that infrastructure has been decimated because all of those
roughneckers went to work somewhere else. The same thing is
going to happen in agriculture. It will happen because we cannot
take these low prices. And we have got very few people to replace
now. We have got a lot of people who think they can farm but they
will find out how hard it is, you know. They do not pass along the
consumer dollar and it is a bad situation.
We have had a lot of mergers at the processing level. That means
that in livestock you have got three packers killing 85 percent of
the cattle. We do not take it far enough as far as antitrust and who
holds the key, who has got their hand around the sack. I am here
to tell you that we have a crisis in American agriculture right now.
It is a crisis. And this slotting business and this selling of shelf
space is killing us. You can have the best product in the world and
it wont get sold. I just brought this along because we had a little
lunch today.
How come you started at 1 oclock anyway?
Chairman BOND. The staff, they did not want me to stay there
for that blueberry cobbler.
Senator BURNS. I brought you some jam.
Chairman BOND. I wanted the cobbler.
Senator BURNS. I will go back and get you the cobbler.
Chairman BOND. That is a deal.
Senator BURNS. But this is what we are talking about. This is
the thing, what we are talking about. I can have a mediocre prod-
uct, which might not be worth anything but if I have a big check-
book, I can get shelf space, not because of the product, because of
the checkbook. And that worries me, that really worries me. So as
far as questions go, I do not have any. I want to put my statement
in the Record.
Chairman BOND. Without objection.
[The prepared statement of Senator Burns follows:]
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37
Senator BURNS. And I think as we see this thing unfold and take
a look at it next year, I think there are several of us that will have
a lot of ideas about how we will get more dollars back to the man
on the land because he is hurting.
I went to a funeral of an old cowboy friend of mine. He was 100
percent cowboy, 76 years old. He went out, stepped on his horse in
the latter part of August, and the old horse kind of got a cold back.
He bucked a little bit, and threw him off. My good friends head
hit a fence post and now he is in the ground. But he went in the
ground happy and I think in agriculture he is probably in the best
place right now. I really do.
But, we have got some real problems and we are going to have
to come up with some people who care. And I have not seen those
people surface yet.
Thank you, Mr. Chairman.
Chairman BOND. Thank you very much, Senator Burns. Obvi-
ously, the Senator from Montana is one who does.
Gentlemen, we appreciate very much your testimony. We are de-
lighted to have you here. We will leave the Record open for further
questions and if any of the Members who are tied up in other meet-
ings have questions, we will submit those for the Record and ask
you at your earliest convenience to respond. If any of you have any
further comments based on what goes on here today, the Record
will be open for 2 weeks. Anything else you want to add, Senator
Burns?
Senator BURNS. No.
Chairman BOND. Thank you again, gentlemen.
Mr. MOORE. Thank you, Chairman.
Mr. STENZEL. Thank you, Mr. Chairman.
Chairman BOND. Our second panel is comprised of Lawrence
Dyckman, Director, Food and Agriculture Issues, Resources, Com-
munity, and Economic Development Division of the U.S. General
Accounting Office; accompanied by Andrea Brown, Assistant Direc-
tor, Food and Agriculture Issues, Resources, Community, and Eco-
nomic Development Division of the U.S. General Accounting Office;
Susan Offutt, Administrator of the Economic Research Service of
the U.S. Department of Agriculture in Washington; and Professor
Gregory Gundlach, College of Business Administration, University
of Notre Dame in Notre Dame, Indiana. Thank you very much for
joining us.
Mr. Dyckman.
STATEMENT OF LAWRENCE J. DYCKMAN, DIRECTOR, FOOD

AND AGRICULTURE ISSUES, RESOURCES, COMMUNITY, AND
ECONOMIC DEVELOPMENT DIVISION, U.S. GENERAL AC-
COUNTING OFFICE, WASHINGTON, D.C.; ACCOMPANIED BY
ANDREA BROWN, ASSISTANT DIRECTOR, FOOD AND AGRI-
CULTURE ISSUES, RESOURCES, COMMUNITY, AND ECO-
NOMIC DEVELOPMENT DIVISION, U.S. GENERAL ACCOUNT-
ING OFFICE, WASHINGTON, D.C.
Mr. DYCKMAN. Good afternoon, Mr. Chairman. With me is An-
drea Brown, Assistant Director, who has been responsible for our
attempt to work on slotting fees. Again, I want to thank you for
38
the opportunity to be here today to discuss our plans to study the

use of slotting fees in the grocery industry.
Slotting fees are generally payments from grocery manufacturers
to retailers to introduce new products. As you are well aware, there
is much anecdotal information about the use of slotting fees and its
impact on small business and consumers but very little hard evi-
dence is available. You, therefore, asked us to conduct a study il-
lustrating the use of slotting fees by individual companies for var-
ious grocery items. In making this request, you recognized that we
would have to rely on the voluntary cooperation of the grocery in-
dustry. It has not been a successful effort on our part.
In short, despite repeated attempts over the last 8 months, we
have been unsuccessful in gaining the cooperation needed from the
industry to conduct this study. Industry officials expressed concern
about providing us or any outside group information that they con-
sider sensitive and proprietary and thus critical to their business
success.
In your letter of October 20, 1999, you requested that we study
the grocery industrys use of slotting fees. Your letter also stated
that the Food Marketing Institute (FMI) and the Grocery Manufac-
turers of America (GMA), the two primary associations rep-
resenting the industry, but not present today, had assured you of
their cooperation in our study.
Our overall plan was to conduct case studies of slotting fee prac-
tices in the industry for various supermarket items at several food
manufacturing companies and grocery store chains. The associa-
tions were to work with us to identify companies willing to speak
with us and to provide documentation to us.
However, companies are not required to provide us access to
their internal documents or discuss these trade practices with us.
Once the companies were identified, however, we planned to visit
them to discuss the extent of their use of slotting fees and obtain
documentation on the dollar amounts of slotting fees on several
food categories, accounting practices for these fees, and related
company policies and procedures.
We planned several strategies to safeguard the company data we
would be receiving. First, we planned to break the link between the
information and the source, and not attribute information in our
report to any one company or individual. Second, we planned to
safeguard this information. Third, we explained to the industry as-
sociations that we are not subject to the Freedom of Information
Act and that we do not disclose to the public any of our records
containing trade secrets and commercial or financial information.
We also obtained a pledge of confidentiality from you, Mr. Chair-
man, to safeguard specific company information from disclosure to
your Committee, its staff and any other Members.
In separate meetings in January 2000, we met with leaders of
the FMI and GMA to discuss our study approach. The associations
told us that they do not compile detailed information on slotting
fees because of its sensitive nature, and that we would have to ob-
tain slotting fee information from individual member firms.
Over a period of several months we sought from FMI grocery
companies that would be willing to give us detailed information on
slotting fees. FMI stated that several members they contacted
39
would not even want speak to us. However, the association did
identify two mid-size grocery chains that might be willing to meet
with us. Both of these grocery chains eventually did meet with us,
and we did discuss slotting fees in general terms but neither pro-
vided documentation nor specific information about the use of and
accounting for slotting fees in their businesses.
GMA, unfortunately, was even less successful in helping us gain
access to members and information. On our own we discussed slot-
ting fees with a mid-size grocery store chain and three food manu-
facturers. Again, none of these companies were willing to provide
us with the type of documentation or the specific information we
were seeking.
Mr. Chairman, this concludes my prepared statement. We would
be happy to answer any questions after the witnesses finish.
[The prepared statement of Mr. Dyckman follows:]
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Chairman BOND. Thank you very much, Mr. Dyckman.

Ms. Offutt.
STATEMENT OF SUSAN E. OFFUTT, ADMINISTRATOR, ECO-
NOMIC RESEARCH SERVICE, U.S. DEPARTMENT OF AGRI-
CULTURE, WASHINGTON, D.C.
Ms. OFFUTT. Good afternoon, Mr. Chairman. I am pleased to be
here this afternoon to discuss the preliminary findings of our ongo-
ing study, fresh fruit and vegetable markets, retail consolidation
and trade practices. It focuses on recent structural and marketing
changes in the produce industry.
Just last week the Economic Research Service published the first
in a series of reports associated with this project, Understanding
the Dynamics of Produce Markets: Consumption and Consolidation
Grow.
Today I will talk about the preliminary results of industry inter-
views on trade practices. The final report is to be published at the
end of the year. A third report on retailer market power will be
published this coming spring.
The produce marketing industry has evolved considerably since
the 1980s. These changes are partly the result of shifts in con-
sumer preferences for produce and partly of the reorganization of
the structure of the industry itself. Americans have become more
health conscious and as a result are eating more fresh fruits and
vegetables than ever. At the same time, consumers demand variety
and convenience.
Retailers have responded to consumers by expanding the variety
of products offered. Stores now offer year-round availability of
many fruits and vegetables, pre-cut produce and more packaged
and branded products.
The first chart which appears to my left shows that the number
of fresh produce items carried by retailers doubled in 10 years,
from 173 in 1987 to 345 in 1997.
45
46
The second chart which is to my right shows that during the

same period the share of branded produce increased from 7 percent
to 19 percent of total sales while the share of fresh cut produce and
packaged salads rose from 1 percent to 15 percent of total sales.
Accommodating these changes in consumer preferences has, there-
fore, led to an overall increase in the demand for shelf space in the
grocery store produce section.
47
48
Since rapid retail consolidation began about 5 years ago, the na-
ture of transactions and coordination between produce shippers
and retail buyers has evolved. Consolidation in the retail industry
has occurred as growth in sales has slowed due to stable food
prices. There have been reductions in household spending for food
consumed at home as people eat out more. In addition, retailers
have faced increased competition from the non-traditional sector,
such as Costco and Wal-Mart. The retailers inability to increase
prices added to the higher costs of providing greater variety, addi-
tional services, as well as new store formats have encouraged gro-
cery retailers to offset costs by seeking efficiency gains through
consolidation.
To take advantage of the potential efficiency gains, the fewer,
larger retailers have been changing the way they do business, mov-
ing from spot cash purchases in wholesale or terminal markets to
greater reliance on long-term contractual agreements and strategic
alliances. The buying and selling of produce has consequently be-
come more complex. In todays transactions, price may be just one
component of a more complicated exchange that may include fees
and services, along with the sale of produce.
Of particular interest today is the incidence of fixed and variable
fees or what we call trade allowances. A fixed fee is a payment that
does not vary with the volume of sales. Slotting fees are defined as
fixed, up-front payments to acquire shelf space for the introduction
of new products. They are but one example of these fixed fees.
Variable fees are assessed on a per unit basis and so over a season
vary with the volume sold. Advertising fees, rebates and volume in-
centives are often structured as variable fees.
When a trade allowance is a fixed fee paid by each and every
shipper, a small firms average cost of operation is greater relative
to a large shipper. A small shippers competitive position may be
eroded, and the imposition of the fixed fee may act as an effective
barrier to entry. In contrast, the variable fee affects shippers equal-
ly by lowering the effective unit price. In a competitive market, the
retailer passes along the lower price to the consumer, in the form
of overall lower retail prices or sales prices.
The shipper benefits when consumers buy more at lower prices.
Our interviews showed that shippers recognize the distinction be-
tween fixed and variable fees and, in fact, shippers are more likely
to complain about a fixed fee, such as a slotting allowance. How-
ever, it was the case that not all fees and services were viewed as
detrimental to the interests of shippers. Variable fees, such as per-
formance-based volume incentives and promotional fees, may help
product movement and may provide competitive advantage but
shippers may question whether these fees actually increase de-
mand for their product, either because of limited consumer re-
sponse to the price changes or to a lack of accountability regarding
the retailers performance.
Based on the information obtained in our interviews, we find
that most shippers and retailers reported trade allowances, that in-
clude fixed and variable fees, and services had increased in inci-
dence and magnitude over the last 5 years. The predominant type
of fees charged in bulk produce sales were variable fees which in-
cluded volume incentives, promotional allowances and other per
49
unit rebates. Fixed fees, which would include slotting fees are also
more likely to be associated with sales of fresh-cut and value-added
items as compared to the bulk produce.
Our analysis required information on the terms of exchange be-
tween produce shippers and retailers. When these exchanges occur
in spot transactions in terminal markets, prices are easy to ob-
serve. Indeed, the USDA collects and publishes just such data on
prices. However, when exchange takes the form of direct sales, or
a proprietary agreement between a supplier and a retailer, its
terms, that is prices, trade allowances, services required, are not
so easily observable.
As the produce business has moved increasingly to direct sales,
we have had to adjust in the way we conducted this study to turn
to a limited number of time-intensive, detailed personal interviews
with fresh fruit and vegetable shippers and national and regional
retailers. The main disadvantage of this approach is the lack of
uniformity in response, with respect to the details on the terms of
exchange, on exactly how much people will tell us about a fee, how
often it is charged and its size.
There are also concerns when we are limited in the number of
interviews we can do about how well the respondents actually rep-
resent industry norms.
Let me close by noting that our study focuses so far just on the
terms of exchange between shippers and retailers. We did not ex-
amine the upstream relationship between growers and shippers.
While some growers are also shippers, many are not, and our fu-
ture work will seek to consider how growers experience the effects
of the increased incidence and magnitude of these trade allow-
ances, of the fixed and variable fees. Growers and shippers may
benefit or suffer equally when retailers offer incentives or require
fees, but if there is a lack of competition in the market between
growers and shippers, the opportunities for passing the fees on to
growers certainly exists.
Thank you very much. I would be pleased to answer any ques-
tions at the end of the presentations.
[The prepared statement of Ms. Offutt follows:]
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55
Chairman BOND. Thank you very much.

Professor Gundlach.
STATEMENT OF GREGORY T. GUNDLACH, PH.D., PROFESSOR
OF MARKETING, MENDOZA COLLEGE OF BUSINESS, UNIVER-
SITY OF NOTRE DAME, NOTRE DAME, INDIANA
Mr. GUNDLACH. Thank you, Mr. Chairman and Members of the
Committee. In summarizing my more lengthy statement I will con-
centrate on four main points.
Chairman BOND. I should have pointed out earlier as is standard
practice, we make the full statements of all the witnesses part of
the Record. And I apologize for not having done that. Thank you
for summarizing.
Mr. GUNDLACH. Thank you. My first point regards the widening
conceptual domain of slotting. As noted by others today, although
originally defining supplier payments to obtain a slot in a whole-
salers warehouse, the terms meaning has expanded in practice.
This expansion has led to varying interpretations and some confu-
sion.
While some confine the term to its original meaning, others use
it to refer to an assortment of trade-based payments that range
across a products entire distribution life cycle and to apply to both
new as well as existing products. Opinions also differ as to what
constitutes slotting based on the nature of payment terms that are
involved. Some narrowly view payments that are unconditional,
fixed in nature, handled off-invoice and paid up-front to be slotting
fees. Others view slotting more broadly to encompass other pay-
ment terms.
Opinions also differ as to the characterization of slotting fees as
either motivated by retailers and imposed on suppliers or moti-
vated by suppliers and offered to retailers. Finally, though atten-
tion toward slotting has focused on its application in the marketing
of food products, slotting is known to exist in other industries and
also on the Internet.
My second point relates to the status of research and challenges
faced by those studying slotting. Though examined by academics,
members of industry and policymakers, our knowledge of this prac-
tice is still in the early stages of development. My examination of
published studies suggests that research on slotting has largely
been devoted to exploratory work and the development of theory.
The empirical research that has been conducted has been mainly
descriptive, reporting on the form and occurrence of slotting. To my
knowledge, only a few studies have conducted empirical tests of
theory against information and data acquired in the field.
Beyond acknowledged variation in terminology, interpretation
and practice, those studying slotting face considerable challenges.
As pointed out in Chairman Bonds opening remarks, most difficult
is overcoming the apprehension of some participants to cooperate
in discussions or grant access to information and data. Further con-
tributing to this challenge is that many slotting arrangements are
verbally negotiated and often go undocumented.
My third point addresses theory and emerging insights for the
consequences of slotting. In this regard, research that has been
conducted provides some understanding of their effects on competi-
56
tion and consumers. The pro-competitive benefits of slotting are

generally explained in two ways depending on how the payments
are characterized.
Slotting arrangements thought to be motivated by retailers and
imposed on upstream suppliers are explained mainly in relation to
the proliferation of new products and their high failure rate. Slot-
ting is theorized to improve the efficiency of introducing and dis-
tributing these products.
Slotting arrangements thought to be motivated by suppliers and
offered to retailers to assist them in marketing the suppliers prod-
ucts are explained mainly in relation to the rising importance and
increasing effectiveness of trade promotion and in-store marketing.
Slotting is theorized to improve distribution efficiency, facilitate
stronger inter-brand competition and to address free-riding con-
cerns that suppliers have for their marketing efforts.
Theories of anti-competitive harm from slotting focus mainly on
how they might be used by retailers and suppliers to distort the
competitive process and result in harmful effects for consumers.
For retailers, attention focuses on the ability of a dominant retailer
with bargaining power over its suppliers to discriminate and
charge fees that are unrelated to or in excess of their associated
costs. When practiced in this way, concerns focus on the creation
of barriers to entry and the potential for increased supplier con-
centration, lower rates and quality of innovation, reduced variety
and choice, and less consumer information that may result.
Additional concern centers on the prospect that the dominant
retailer may also face limited competition in its downstream
consumer markets. Under such circumstances the concern is that
having charged an unreasonable fee the retailer may exercise its
market power, keeping the surplus rather than passing it onto con-
sumers in the form of lower prices or applying it in other beneficial
ways. Where this occurs consumers can end up paying higher
prices and/or receiving fewer benefits than they would but for the
slotting.
For suppliers, attention focuses on the ability of a dominant sup-
plier to condition its payments to retailers on the right to exclude,
limit or otherwise marginalize rival competitors. Concern centers
on the prospect that excluded or disadvantaged suppliers may no
longer be in a position to constrain the exercise of market power
on the part of the powerful supplier. Some forms of slotting pay-
ments may be conditioned on the right to exclude rivals or to sim-
ply limit or disadvantage their ability to compete. Where these
rights materially raise rivals costs, they can marginalize existing
rivals or deter entry by potential competitors. Costs are raised
given the added burden of overcoming the imposed competitive lim-
itation or disadvantage.
In the absence of sufficient offsetting benefits or where such ben-
efits could be achieved in some less exclusionary or restrictive way,
slotting arrangements of the kind described can diminish competi-
tion and result in harm to consumers. Consumers are harmed
where the arrangement enables the powerful supplier to create,
preserve or enhance market power.
My fourth and final point addresses recommendations for future
research. Let me first applaud this Committees efforts to appro-
57
priate funding for examining slotting practices. Future research

that is conducted should first acknowledge the increasing array of
trade arrangements and practices that have come to fall under the
rubric of slotting. Future research should also emphasize a deeper
conceptual and more empirical understanding of slotting.
Data gathered in future studies should in particular include
disaggregate or transaction level data that enables researchers to
more fully understand the nature of slotting arrangements and
how they are conducted. Future research should also focus on the
continued development of theory for understanding slotting. Spe-
cific efforts should be devoted to slotting that is motivated by re-
tailers and imposed on suppliers. Though considerable anecdotal
evidence characterizes slotting in this way, we continue to be chal-
lenged to fully understand these arrangements and their effects.
Finally, research should be directed toward understanding slot-
ting in other industries and in particular its emergence in elec-
tronic commerce. Though important efforts currently focus on slot-
ting in the marketing of food products, much could be learned
through examining its application in other settings.
Thank you, Mr. Chairman, and Members of the Committee.
[The prepared statement of Mr. Gundlach follows:]
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Chairman BOND. Thank you very much, Professor Gundlach.

Let me ask Mr. Dyckman. The GAO has in the past successfully
obtained confidential information from other industries; has it not?
Mr. DYCKMAN. Yes, on a case-by-case basis we have had some
success, for example, in the airline industry and then in the de-
fense industry. Frequently it depends on whether or not the con-
tractor or the private firm has some interest in cooperating with
us but we have had some success stories; that is correct.
Chairman BOND. And have the confidentiality agreements
worked well? Have you had any problems with information that
you have been turned over, proprietary information leaking out?
Mr. DYCKMAN. Not to my knowledge, sir.
Chairman BOND. How does the cooperation you have experienced
in that area compare with, I would use the word cooperation light-
ly, but the relationship you had in these industries?
Mr. DYCKMAN. As you know, Sir, we do not have the information
that you desire. We went to the associations. We made a good faith
effort. We explained to them and they knew quite well that we did
not have authority but we made certain assurances to them. You
went out of your way to write us a letter giving a pledge of con-
fidentiality.
They told us they contacted some of their members. One of the
associations e-mailed 55 of their members or so. They did not en-
courage their members to cooperate with us. So I think without en-
couragement from the associations it would have been very dif-
ficult, and we anticipated that quite frankly. I have worked for
GAO for 31 years and this is the first time I have had to report
to a committee that I have been unsuccessful in trying to carry out
the work. So we do not feel fulfilled.
As you said in your opening statement we gave it our best ef-
forts, but without the cooperation of the industry we could not
carry this out.
Chairman BOND. Thank you very much, Mr. Dyckman. Ms.
Offutt, it is clear from your testimony that payments, up-front fees
have been increasing. Is this practice increasing over recent years?
Ms. OFFUTT. Yes.
Chairman BOND. You mentioned something that struck me. You
mentioned in the competitive marketplace, in the real competitive
worldwe all like to think there may be a real competitive world
out therethat these prices would result in lower prices that the
consumer would pay because obviously there would be competition.
Do you have any evidence that these payments have, in fact, low-
ered fees, the ultimate price that consumers pay at retail?
Ms. OFFUTT. We did not look directly at evidence that would
have suggested that, for instance, a fee paid for an advertising
campaign, to advertise a sale, actually resulted in lower super-
market prices or actually induced people to buy more. We did not
ask for that kind of transaction data from the retailers.
Chairman BOND. You suggest, in your written testimony, that
the study did not review how the increased incidence and mag-
nitude of fees effects growers. Based on what we have heard here
today can we expect you all to pursue this question and look to the
impact it may be having on growers?
Ms. OFFUTT. Yes.
67
Chairman BOND. Did you review any individual markets to see

the competitive impact generally?
Ms. OFFUTT. In the third stage of the study we are going to look
more directly at the question of whether or not the practices are
having anti-competitive effects. The study that we are completing
now that I spoke about this afternoon is what was referred to as
a more descriptive approach. What are the fees? How are they in-
curred?
But it does not actually allow us to draw a judgment about their
harmful or beneficial effect. It just gives us the basis for going on
to ask more.
Chairman BOND. We need that basis and it seems to me that we
have outlined a pretty clear area for inquiry here because I think
certainly the testimony we have had today, the testimony that was
presented to the FTC indicates there are potentially some very se-
rious problems. Did the economic research service run into any of
the problems that the GAO encountered in findingyou said you
talked only about shippers or retailers willing to talk about the
practices and about the fees?
Ms. OFFUTT. Yes, we did. We had on both sides shippers and re-
tailers, people who were not interested in speaking with us at all.
Some were more forthcoming about the nature and the size of fees
but I think it is fair to say overall the retailers were less forth-
coming than shippers were in answering our questions. And really
we got very little of the kind of detailed transactions data that you
have to have to make these determinations of benefit and harm.
Chairman BOND. As I stated at a previous hearing, in one of my
prior lives I was an antitrust attorney working on the Robinson-
Patman Act and related matters. I know how much fun it is to
compile that kind of information. Nevertheless, it seems to me that
that could be critically important and I would hope that the Eco-
nomic Research Service would pursue the information and the im-
pact that this has on growers as well as those down the line and
ultimately the consumers. Are the consumers getting any better
deal, or are they simply losing choices that should be available to
them?
Professor Gundlach, while we are speaking about that, you
talked about some of the considerations. Based on your review
what kind of antitrust laws or consumer protection laws might be
called into play here? Talk about having additional laws. Do you
think, No. 1, are there adequate laws and what would they be and
what, based on your experience, might be needed from here?
Mr. GUNDLACH. Mr. Chairman, I hesitate to make a comment re-
garding the nature of laws that might apply to the specific prac-
tices that we are talking about. Though I do have a legal back-
ground, my expertise is more in the behavioral aspects of the fees
and how they might have implications for competition. So I respect-
fully would not like to answer that question, if I may not.
Chairman BOND. OK. I will throw out a few, in addition to the
Robinson-Patman Act, sections I and II of the Sherman Act, section
V of the FTC Act, the Clayton Act. It sounds like there are some
good weapons out there but based on your study with the growth
of these slotting practices what would you say the future holds for
68
the small grower in this instance or, more broadly, the small man-
ufacturer who is seeking access to retail shelves?
Mr. GUNDLACH. If I can take a step backwards, I think that slot-
ting is really symptomatic of the confluence of three distinct forces.
One of those forces has been spoken of today and that is the shift
of power that has occurred in many of our distribution channels
into retailers hands. The second force is the proliferation of new
products and the third force is the increasing importance of trade
promotion. All of those are coming together in terms of their effect
on slotting.
In terms of what the future holds, at the present rate of progress
slotting will make it very difficult for small, independent and those
suppliers without resources, overcome some of the barriers that
these forces have brought forth. Particularly that these fees will
provide high-entry barriers for smaller firms.
Chairman BOND. And what is your analysis of the impact that
those fees themselves may have and the results of those fees in
limiting access of smaller manufacturers have on the choices avail-
able to the ultimate consumer? When the consumer goes into the
marketplace, does she have fewer choices? When I go into the mar-
ketplace, am I cut out, likely to be cut out of having an opportunity
to buy a better quality product at a lower price?
Mr. GUNDLACH. To the extent that they do create barriers to
entry for firms that would offer higher-quality productsmore in-
novative products in the marketplace, I do think they create chal-
lenges of choice. These challengers are not only in terms of the op-
tions, but in the process of choice that consumers have. While
smaller suppliers may be able to find access to consumer markets
through other forms of distribution, these challenges will raise the
costs to consumers of having to seek out these other forms of dis-
tribution to secure the options and variety that they desire.
Chairman BOND. Thank you very much, Professor. We have been
joined by my colleague and Ranking Member, Senator of Massachu-
setts, Senator Kerry. Welcome.
OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY,
RANKING MEMBER, COMMITTEE ON SMALL BUSINESS, AND
A UNITED STATES SENATOR FROM MASSACHUSETTS
Senator KERRY. Mr. Chairman, thank you very much. I apologize
to you and to all the panelists for not being able to be here sooner.
I personally started the ball rolling on the issue of slotting fees
over a year ago, and I wanted to participate in the entire hearing.
But today has been one of those exceptionally conflicted days
around here and I apologize for that. On the other hand my able
staff has been here throughout and I look forward to reviewing the
Record when it becomes available.
The practice of charging slotting fees, in my judgment, is highly
questionable. The industrys conduct and its unwillingness to co-
operate fully with the efforts to understand the use of slotting fees
has effectively invited Congress to put the practice under a micro-
scope in order to determine to what extent it does effect small busi-
nesses and consumers. I want to thank you, Mr. Chairman, for
your significant and genuine interest in this and for your signifi-
cant collaboration in it. I think that your own experience as an AG
69
and your experience as a Governor have prompted you to be auto-

matically tuned in to what this means. In a free-market system,
which we pride ourselves on having, this practice does not seem
right, nor does it smack, at least on the surface, and I emphasize
on the surface, nor does it smack of normal free-market practices
to know that somebody could have a really rather extraordinary
product, but be very small and not have the power to be able to
get their product to consumers. Even though it could conceivably
cost significantly less and be a better product.
Now, conceivably, just as a cost of doing business, like fran-
chising costs, it might, conceivably under some readily interpret-
able, clear fairly arrived at and accessible system, be a cost that
people who manufacture something need to factor into their cost of
goods and ultimately pass onto the consumer. But, that does not
appear to be what we are seeing here. Neither accessible, nor ra-
tional, nor clear, and most importantly, instances that we have had
reported to us by individual small retailers which appear to be on
many occasions spontaneously arrived at, perhaps in some cases
even without the knowledge of upper management or of corporate
headquarters. Though that does not appear to be true in cases in-
volving chains. But, there are instances where we have seen a form
of creative entrepreneurial effort engaged in by people who happen
to control the access to those shelves.
So, there is a lot going on here. And frankly, as I said earlier,
it invites an even greater level of scrutiny and much more sus-
picion that we are having trouble getting answers. There have been
a number of retailers that I have talked to privately, and I have
heard all kinds of horror stories, which I could repeat, and some
of them have been repeated, but they will not go public. And the
reason they will not go public is pretty clear. I mean the capacity
for being blackballed and for suffering economic injury as a con-
sequence, particularly in a world where they do not quite know
how far Congress is really going to go here? What is the sustain-
ability of Senator Bond and Senator Kerry and the Small Business
Committees interest in this? How far will this go? So if we go pub-
lic a year from now, their interest may weigh in and they get
burned. I understand that.
And so it is important for us to be very clear about the sustain-
ability of this effort and our efforts to try and understand it. I have
not talked to the Chairman about this yet, but maybe this is some-
thing that is more perfectly suited to the Permanent Subcommittee
on Investigations, which might be able to be of greater assistance
to the GAO and/or the FTC in their efforts to pursue it.
I do not know the answers to these questions. I did not come
here with a predetermined outcome, but in the absence of our abil-
ity to be able to create a rationale and an understanding of this,
and in the face of increasing reports from people who testify as
they have today and on other occasions about an uncooperative in-
dustry, we need to understand it better.
So my message today, I am not going to ask questions of the
panel because I do not like coming in late and being repetitive, but
as I said I will review this record carefully.
I first raised the issue because a businessman in the Midwest
told me how his business had suffered time and again because he
70
was hit with onerous fees to sell his product instead of another
brand. Rather than both brands competing fairly, even when there
was shelf space for both and even when his brand was selling
wellmaking money for the business and he was filling repetitive
orders based on consumer demandhe was forced to pay fees to
get his product on the shelves. And that sparked my interest be-
cause it just did not seem right. It did not seem fair. It did not
seem consistent with the concept of this Committees commitment
to help small businesses thrive.
So, Mr. Chairman, I thank you for your energy and effort. And
I hope, clearly, that the FTC and the GAO will be able to complete
their task. For those out there who are fighting this practice, our
message to you really is come and talk to us. Help us to under-
stand. We have proven our ability, to maintain anonymity. We
have proven our ability, I believe, to maintain even our interest
and we will do so as we go down the road. Thank you, Mr. Chair-
man.
[The prepared statement and attachment of Senator Kerry fol-
low:]
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72
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Chairman BOND. Thank you very much, Senator Kerry. Thank

you for your initiative and support for this effort and for the au-
thority that you bring to our efforts.
A couple points you mentioned, we have been able to gather in-
formation from many aggrieved parties by slotting. If you will con-
tact this Committee, we can assure you of confidentiality in hopes
of learning more.
Second, under transparency I would only reiterate what the Sen-
ator from Massachusetts said. One of the first things you want to
know about this process is if it is justified, if it is reasonable, if it
is necessary and economically beneficial, why in the dickens is it
kept so secret? That, more than anything else, makes us sus-
picious. If you have got a good justification, why dont you lay it
out? If it is the best thing since sliced bread, why isnt somebody
willing to talk about it? That is why the lack of transparency as
discovered by the GAO and by our continuing efforts makes it high-
ly suspicious.
Third, you mentioned the Permanent Subcommittee. I had an op-
portunity to talk with Senator Collins of Maine about this today.
She had been approached by a number of produce farmers from
Maine and I think that this may be a good area for us to refer to
the Government Affairs Committee for their work and assistance
on this as well so they can continue to help us.
But I want to thank all of our witnesses for taking time out of
a busy schedule to attend today. I know we have a number of
produce farmers in the audience who are here and taking time out.
If you choose to do so, would you hold up your hands so we can
see who is here? Thank you all very much. We will only take pic-
tures of the backs of your heads. We appreciate very much your
coming. It has been an informative hearing.
There is clear evidence of a very disturbing impact on small
produce farmers from these fees. The use of fees raises numerous
issues, not the least of which is why the fees may be necessary. It
is unfortunate that the industry representative did not appear
today. We will be asking them to explain why they chose not to and
why if the process is such a good one, they are not willing to defend
it.
We again note there has been much work done on slotting allow-
ances, including increased attention by the FTC. We would urge
our friends at the FTC to give careful consideration to analysis of
this practice and determine the competitive or anti-competitive ef-
fects. We, as I said, intend to follow up with the FTC and we have
urged, at this point have included in the Senate mark on the
Commerce, Justice, State, and the Judiciary Committees Appro-
priations bill $900,000 for them to do further work in this area. We
intend to follow up with them to assure that that additional money,
if we can get it to them, will be used to collect the data, establish
guidelines and take such other necessary steps.
I would urge the ERS to continue and expand upon its work as
well. Professor Gundlach, we will look forward to hearing from you,
and your continuing analysis. Finally, for anyone who does have in-
formation, we would ask that you forward it to the Small Business
Committee.
75
I thank all witnesses and those who are here in the audience
today for joining us. We obviously are going to continue to be revis-
iting this as long as this practice remains widespread, and particu-
larly if it remains hidden from view, we are going to continue to
do our best to see that it is brought out in the open. Thank you
very much. The hearing is adjourned.
[Whereupon, at 2:40 p.m. the Committee was adjourned.]
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Senate Hearing, 106TH Congress - Slotting Fees: Are Family Farmers Battling To Stay On The Farm and in The Grocery Store?

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Senate Hearing, 106TH Congress - Slotting Fees: Are Family Farmers Battling To Stay On The Farm and in The Grocery Store?

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(1)

THURSDAY, SEPTEMBER 14, 2000

UNITED STATES SENATE,

Additionally, this hearing will address produce farmers being

body who complains about the fees publicly, even anonymously, if

stand the changing business dynamics in the food delivery system

To that point, transparency and knowledge of industry practices

ribution in terms of price setting from suppliers discussing whether

In conclusion, today many growers are concerned with what they

Chairman BOND. Thank you very much, Mr. Stenzel.

STATEMENT OF DAVID MOORE, PRESIDENT, WESTERN

In another example, a prominent member has articulated that

I might just highlight the fact that we have had a disastrous

Chairman BOND. Thank you very much, Mr. Moore.

these pay-to-play or pay-to-stay payments rarely result in any visi-

Chairman BOND. Thank you very much, gentlemen.

So no, I do not see that there is any benefit whatsoever back to

STATEMENT OF LAWRENCE J. DYCKMAN, DIRECTOR, FOOD

the opportunity to be here today to discuss our plans to study the

Chairman BOND. Thank you very much, Mr. Dyckman.

The second chart which is to my right shows that during the

Chairman BOND. Thank you very much.

tion and consumers. The pro-competitive benefits of slotting are

priate funding for examining slotting practices. Future research

Chairman BOND. Thank you very much, Professor Gundlach.

Chairman BOND. Did you review any individual markets to see

and your experience as a Governor have prompted you to be auto-

Chairman BOND. Thank you very much, Senator Kerry. Thank

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